SAN FRANCISCO (KCBS) – The cash-strapped state’s grand plan to sell $10 billion of bonds in order to pay some of its bills has come up against a glut of municipal debt on the market.

Municipal bond prices have been falling and their yields rising since November 12 when California announced its latest bond sale.

“A far greater amount of debt came to market not just in California but throughout the country, and investors are spooked,” said Alex Merck, president of a Palo Alto mutual fund company, Merk Investments.

“This could be a turn of a tide. It could be a blip, but usually these blips may turn into tides as people get very, very wary of these auctions.”

KCBS’ Margie Shafer Reports:

California is now looking to roll its bonds into long term Build America Bonds that have federal government backing and should be an easier sell.

The state bond sale was seen as a test for governments looking to raise money. The tepid response suggests municipalities might have to pay more to attract investors.

On Wednesday, Moody’s Investors Service downgraded San Francisco’s bond rating because the city ended the last fiscal year with a balance sheet weaker than any in the last ten years.

A city spokesman noted that San Francisco still has a better rating than many local governments.

(© 2010 CBS Broadcasting Inc. All Rights Reserved. The Associated Press contributed to this report. This material may not be published, broadcast, rewritten, or redistributed.)


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